Are You Saving Your Savings?

31 March 2014

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For literally years, I have been trying to write a post about how savings aren’t really savings unless you put them towards something long-term. I’ve always gotten stuck, either on how to explain what I mean, or on the vocabulary to make it clear. Why is it so hard to talk about saving?

Well, I can stop trying, because super-smart Paula Pant, from Afford Anything, has written a post that says what I have been trying to say. I don’t agree with everything in this post (do I ever?), but her basic principle is spot-on: Reallocated spending and deferred spending are not wealth building tools. You can jiggle the definitions any way you want, but they’re still spending. Reallocated spending has little value as part of a financial plan. You want to focus on deferred spending and building wealth. And despite the fact that they often get lumped together with the term “saving,” neither of them have anything to do with buying something at a discount.

What the heck am I talking about?

If you buy a pair of pants for $10 off, you aren’t saving $10. You’re not spending that $10 on those pants. Most people will then use that $10 for another purchase, usually within the same general time period. “I got a great deal on that refrigerator, so let’s go out to lunch.” That’s not savings; it is reallocated spending.

However, let’s say you take that $10 and you put it in your car savings account. This money is temporarily saved, or, as Paula says, you’ve deferred the spending. Deferred spending is an important part of a solid financial strategy, because it allows you to pay cash for big-ticket items and avoid debt. I’m completely in favor of deferred spending and I encourage it for almost all your purchases.

True wealth building, however, comes when you take that $10 and you do something long-term and income generating. You might use that $10 to build a website, buy a book on a career that interests you, or buy a bunch of seeds for your vegetable garden. You might put it in your Individual Retirement Arrangement (IRA), save it to purchase an annuity, or even put it towards buying a real estate investment property. If you keep adding $10 here and $10 there, you will eventually build up a bunch of stuff that generates income. This is where we see the value of true savings.

Without getting into a debate about the details, such as whether paying college tuition is spending or investing, it is still good to have this general mindset when you consider your spending and your saving. There is a place in every financial plan for spending, deferred spending, and investment savings. Make sure you understand which is which, and which one will help you achieve your long-term financial goals.

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